Sunday, December 8, 2013

November 2013 Class and Component Prices were announced on December 4. The Class III price was $18.83/cwt., which was a record for the year. The Class III milk price increase was driven by the increase in the milk protein price, which was up 6.5% to $3.63/lb., also a record for 2013.

The long-term trends again reflect the increasing value of milk protein in the mix of dairy components. Protein is needed for the economical production of cheese, the thickening of yogurt, and for production of Skim Milk Powder. These three diary products are the growth items for the U.S. dairy Industry. Butterfat was below the trend line at $1.63/lb. "Other Solids" retained it's new value level at $.40/lb.

Payment for milk protein hit a record 58% of the total Class III milk price in November. Milk protein production is key to producer revenue and
feed management of amino acids in the diet can positively influence milk protein production. This practice is increasingly important for a dairy producer's financial success where there is payment for protein.

Inventories of the key end products that are mathematically linked to milk prices are discussed below. These inventories are all relatively low which will help maintain and drive favorable milk pricing.

INVENTORIESCheese is the most important driver of milk prices. (See the April 23, 2009 post to this blog for an explanation of this.) Below are the charts of natural and American cheese stocks. These inventories were high in early 2013, which created concern for dairy pricing. These stocks have now fallen to the safe levels which should maintain favorable cheese and Class III milk prices in the near term.

Dry Whey has gained importance, as it is the basis of "Other Solids" pricing, which is contributing over $2/cwt. to the Class III price. The dry whey inventories are very low which is keeping the value of "Other Solids" at near record levels.

Butter pricing is the key determinant of butterfat prices. It is a very small contributor to the standardized Class III price but it can be important if a producer is able to improve the butterfat content of his milk.

The Nonfat Dry Milk prices can also contribute to producer revenue as a higher price can influence the Class I, II and IV milk prices, which in turn influence the Producer Price Differential. (See the October 6, 2013 post to this blog for an explanation of these formula driven interactions). The inventory of nonfat dry milk is extremely low. This should ensure a strong price for the near future.

This blog post is intended to support the post on November Class and Component prices with an analysis of the most recent dairy export data. Dairy exports are becoming a very important sector for growth of the U.S. Dairy Industry. They also bring increased volatility to the Industry.

Dairy Export data for October 2013 was available on December 5. These exports continue to hit new highs. In October, 16.3% of the total milk solids produced were exported. There are increases across all product export categories. The most exported products are Nonfat Dry Milk/Skim Milk Powder, Dry Sweet Whey, and Lactose. The majority of these three products are exported and these exports therefore have a significant impact on the price of Nonfat Dry Milk (the basis on the Class IV milk price) and the price of Dry Whey (the basis of "Other Solids" pricing for Class III components).

Mexico remains the biggest U.S. export customer, nearly double the next largest export customer, South Korea.

The majority of the export market depends on products with minimal water content for economical international shipping. Therefore component levels are key to this market.

The price of Cheeseis the most important parameter of Class III milk pricing and cheese exports continue to drive added product demand. For the first 5 months of 2013, cheese exports managed only slight increases over 2012. However, for the next 5 months cheese exports have shown significant increases compared to the prior year. While this is a nice gain, cheese exports at 6.1% of production YTD are the lowest export category. There is still a great opportunity to increase cheese exports.

Similarly, butterfat exports are at all time highs for the months of September and October. This is also a significant increase over the early 2013 months. The U.S. has exported just over 10% of butterfat produced.

Whey exports remain strong but are not significantly above prior year levels. The majority of dry whey is exported and strong exports need to keep pace with the increases in cheese production to keep whey prices high. The Class III "Other Solids" price is determined by the price of dry whey.

In recent months, the price of nonfat dry milk has increased and it is now positively influencing the Class I, II and IV milk prices. (See the October 6, 2013 post to this blog for an explanation of this relationship.) Like dry whey the majority of nonfat dry milk/skim milk powder is exported. This export market is, therefore, very important to maintaining strong demand and good nonfat dry milk prices.

The global market standard is skim milk powder, which has a minimal protein content of 34%. Nonfat dry milk has no minimal protein content. For the last two months, U.S. production of skim milk powder has reached a new high of over 40% of the total of production of nonfat dry milk/skim milk powder. This change to more skim milk powder demonstrates that the U.S. dairy industry is recognizing the opportunity for U.S. dairy products globally and positioning the industry to meet the specific demands of the global market.

EXCHANGE RATES

Very important to these exports is favorable exchange rates. A weaker USD makes U.S. dairy products less expensive than the competition in the global market. On the charts below, a weaker USD is shown as a positive (higher) value. The most noticeable point on the USD/NZD chart below is 2008 when the U.S. dairy export market crashed as a result of the strong USD. Currently, the USD is at a reasonably weak position supporting U.S. dairy exports.

The other major competitor in the global dairy market is Europe. The USD has slightly weakened in 2013 also supporting U.S. dairy exports.

Click here to see the December post on the positive influence of dairy exports on product inventories and component prices.